Upbeat Qantas sees strength in economy

Alan Joyce has delivered an upbeat assessment of the economy after Qantas posted its second-highest profit.

Alan Joyce announces Qantas’s full-year results in Sydney yesterday.

Qantas chief executive Alan Joyce has delivered an upbeat assessment of the economy after the airline posted its second-highest profit on the back of a strengthening domestic market.

Mr Joyce reported that underlying profit before tax — the airline’s preferred measure that strips out one-offs — was down 8.6 per cent on last year’s $1.53 billion record to $1.4bn as the benefits of lower fuel prices and an aggressive three-year restructure were offset by fierce competition on international routes.

The air carrier revealed that its full-year after-tax profit had slipped 17 per cent to $852 million, in part because the year prior had included a gain due to the sale of the Sydney domestic terminal.

Mr Joyce said growth in the business and leisure parts of the domestic arm were “more than offsetting” the decline in resources, while there was “some strength” across the broader economy.

“We can hear some of the information that’s coming out from other sectors like retail that are seeing weakness there,” Mr Joyce told The Weekend Australian.

“But in reality we haven’t seen weakness, certainly in the last year. We’ve actually seen some strength across the board.”

Qantas had seen a strong performance from its “Business Rewards” program that targets SMEs which he said could be “masking some underlying weakness in the economy but at the moment it is actually quite strong for us”.

He said it was “actually quite robust” across the board domestically, while the only weakness “is the resource sector, and the resource sector is levelling out”.

Pointing to the improvement in iron ore prices, he said “we’re not calling the bottom yet because we are obviously keeping an eye on it but there are some positive signs, some green sprouts coming out, which are a good sign”.

“But we’re still planning for a slight decline this year, with the potential for upside” on mining routes, Mr Joyce added.

Qantas has redeployed planes away from unprofitable routes used by the resources sector and yesterday indicated that planned cuts of 1 per cent to domestic ­capacity in the first half of the 2018 ­financial year would come mostly from resources routes.

Earlier this month, Virgin ­Australia chief executive John Borghetti pointed to surveys showing a disconnect between improved business confidence and stagnant consumer confidence, a view echoed by others including Orora boss Nigel Garrard.

In line with this, Medibank chief executive Craig Drummond yesterday highlighted that household budgets continued to be under increasing pressure, which was fuelling affordability concerns.

However, yesterday Mr Joyce said he was seeing demand from business and consumers “as being quite healthy in the domestic ­market”.

Mr Joyce said yesterday’s result represented the finish of the flag carrier’s three-year turnaround plan, but signalled that he was still committed to cost-saving targets of $400m a year.

The three-year program had included laying off staff, moving away from unprofitable routes and fleet changes.

Mr Joyce yesterday said there was “no intention of being complacent” and that the “energy and focus” of the turnaround strategy would be put “into continuous improvement”.

After a seven-year dividend ­hiatus that only ended last year, shareholders will see up to $500m returned to them with an ordinary unfranked dividend of 7c a share plus an on-market buyback of up to $373m.

Citi said the buyback signalled that the airline’s board saw the current share price as undervaluing the company.

On the international market, the carrier said competitor cap­acity of 11 per cent was added in the first half, but this had eased to an 8.5 per cent increase over the full year, providing “some relief” from a squeeze on airfares. Qantas International posted underlying earnings before interest and tax of $327m, which was down $185m.

Macquarie Securities analyst Sam Dobson said in a note to clients that the outlook for domestic was “positive”. Qantas Domestic reported that its underlying EBIT was up $67m to $645m as it managed capacity and costs.

Jetstar Group, the low-cost subsidiary, reported its underlying EBIT was down $35m to $417m.

The company will also deliver a $2500 bonus to staff, a move in line with Air New Zealand’s promise this week to give its staff a $NZ1700 ($1550) bonus after that airline also reported its second-highest earnings.

Qantas shares closed up 22c at $6.02 yesterday.

Ratings agency Moody’s said the result was “a strong performance in a competitive market”.

Moody’s senior credit officer Ian Chitterer singled out Qantas Loyalty, saying the business provided diversification from the more volatile airline earnings. That division reported underlying EBIT up $23m to $369m as the ranks of the Frequent Flyer program swelled.